The Perils of Behavior-Based Personalization
Marketing Science, Vol. 30, No. 1, pp. 170-186, January-February 2008
Posted: 9 Nov 2006 Last revised: 7 Feb 2011
Date Written: February 2011
“Behavior-based personalization” has gained popularity in recent years, whereby businesses offer personalized products based on consumers’ purchase histories. This paper highlights two perils of behavior-based personalization in competitive markets. First, although purchase histories reveal consumer preferences, competitive exploitation of such information damages differentiation, similar to the classic finding that behavior-based price discrimination intensifies price competition. With endogenous product design, there is yet a second peril. It emerges when forward-looking firms try to avoid the first peril by suppressing the information value of purchase histories. Ideally, if a market leader serves all consumers on day one, purchase histories contain no information about consumer preferences. However, knowing that their rivals are willing to accommodate a market leader, firms are more likely to offer a mainstream design at day one, which jeopardizes differentiation. Based on this understanding, I investigate how the perils of behavior-based personalization change under alternative market conditions, such as firms’ better knowledge about their own customers, consumer loyalty and inertia, consumer self-selection, and the need for classic designs.
Keywords: behavior-based personalization, behavior-based price discrimination, revealed preference, segmentation, targeting, competition, customer relationship management, endogenous information generation
JEL Classification: L11, M31
Suggested Citation: Suggested Citation